Justice Department targets S&P

The Justice Department has filed civil charges against Standard & Poor’s over mortgage securities it rated in the run-up to the 2008 financial crisis, setting up a high-profile showdown between the government and the much-maligned ratings industry.

In a lawsuit filed late Monday in the U.S. District Court for the Central District of California, the Justice Department alleges that S&P knowingly executed a scheme to defraud investors between September 2004 and October 2007 in its ratings of mortgage securities that were tied to subprime mortgages.

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The department argues that in order to attract more business from investment banks that put together these types of securities, S&P was knowingly giving out favorable ratings to these products to the detriment of the investors who bought them.

“Put simply, this alleged conduct is egregious — and it goes to the very heart of the recent financial crisis,” said Attorney General Eric Holder said in a statement Tuesday. “Today’s action is an important step forward in our ongoing efforts to investigate and punish the conduct that is believed to have contributed to the worst economic crisis in recent history.”

The Justice Department said that state attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi have filed or plan to file similar lawsuits.

New York Attorney General Eric Schneiderman is also expected to file a lawsuit.

The lawsuit is a long-awaited major challenge from the government against a ratings agency investors relied on during the housing bubble and the ensuing 2008 financial meltdown.

The Obama administration has been under fire for not being more aggressive in pursuing cases against Wall Street firms that played a role in the financial crisis that led to the Great Recession.

The lack of action against credit rating firms had not gone unnoticed on Capitol Hill, and many lawmakers welcomed the move against S&P this week.

“I want to commend the Justice Department for taking long overdue action to hold S&P accountable for its conduct leading up to the 2008 financial crisis,” Rep. Maxine Waters (D-Calif.) said in a statement Tuesday.

But by choosing to file civil rather than criminal charges, Justice disappointed critics who argue it needs to start using the threat of jail time to prevent future misdeeds.

“It seems the Justice Department is trying to sue the country’s way out of the fiscal crisis instead of bringing cases that might have a real deterrent effect,” Sen. Chuck Grassley (R-Iowa) said in a statement. “Most civil suits are simply the cost of doing business and aren’t enough. Unfortunately, this appears to be another instance of the civil case-only, ‘too-big-to-jail’ mentality at the Justice Department.”

On Monday, before the lawsuit was filed, S&P said DOJ would be unjustified in pursuing a case because the firm based its assessments on the same data and information as other companies and government officials that also concluded that trouble in the housing market would be fleeting.

“A DOJ lawsuit would be entirely without factual or legal merit,” S&P said.

The company said it “deeply regrets” that the ratings did not anticipate the rapid collapse in the housing market and pointed out it did downgrade hundreds of subprime mortgage bonds in 2007.

“With 20/20 hindsight, these strong actions proved insufficient — but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith,” S&P said in the statement.

DOJ is bringing its lawsuit under the Financial Institutions Reform, Recovery and Enforcement Act, which requires a lower burden of proof for the government and allows for larger penalties against fraud.